What is a Credit Score?

Back in the day, you probably obsessed over your SAT score, and today you might be curious about your Uber rating. But there’s another number that should command your attention. It’s one that will follow you throughout your adult life and could mean the difference of tens of thousands of dollars over your lifetime: your credit score.

Even though it seems unfair to reduce all your financial habits to a “number,” your credit score basically sums up the way lenders view your financial health and ability to repay a loan in one number. So if you want to get the best rates and the most borrowing options, you’ll want to make sure your credit score is golden. Here’s more on what a credit score is and how lenders use it to make decisions.

What is a credit score?

A credit score is the three-digit number lenders use to determine how safe it will be to loan you money. The only way they can determine if you are risk-worthy is to see how you’ve handled credit in the past and assume that you will do the same with whatever new loan you are requesting. Therefore, the higher your credit score, the better, as in the more willing lenders will be to extend credit because you have shown you can responsibly pay it back.

But the whole world doesn’t march to the same beat…there are actually two main types of credit scores. The FICO score was created in 1989 by data analytics company Fair Isaac Corporation to introduce an industry standard: FICO. Then in 2006, VantageScore was launched by the three nationally recognized credit bureaus, Equifax, Experian and TransUnion, to compete with FICO.

That means you have more than one credit score to watch out for. And while FICO claims that more than 90 percent of the top 100 largest lenders use its score, which may make it seem like the one to watch, there are even different types of FICO scores. For example, a credit card company is most likely to use a FICO Bankcard Score, while an auto lender will use FICO Auto Score. These special subsets create different versions of your credit score that go from 250 to 900 and weight your behavior specific to that category more heavily; i.e. your past auto loan behavior will factor higher into your FICO Auto Score than your regular FICO score.

There are also a number of iterations of your base FICO score, as the Fair Isaac Corporation frequently tweaks its formula to accommodate updated standards. The newest version of your base FICO score, FICO Score 9, is currently being rolled out but hasn’t yet been adopted by all lenders. In an example of how FICO Score 9 differs, reported rental history can give your credit score a boost and unpaid medical collections have less of a negative effect than in previous versions. Mortgage companies will likely use older versions of the FICO score—since a mortgage is a big-ticket item, they are a little bit less risk-averse, and the older scores are more conservative.

Similarly, VantageScore has rolled out four versions over its lifetime; the latest one is VantageScore 4.0. This iteration considers “historical” credit utilization rate (the others only look at your current situation) and gives a little less weight to a tax lien or judgment.

How do I know which score to track—and how can I improve it?

We loaded you up with a ton of background, but don’t worry…it won’t all be on the test. Because even though the formulas for figuring your credit scores vary slightly, they all use essentially the same information, albeit with slight tweaks. That means that good credit habits are good credit habits across the board and will help keep your credit scores shiny.

Here’s how FICO and VantageScore describe the weight of various factors they’re considering.

FICO uses the following model to determine your credit score:

Payment history (35 percent)

Have you made all your payments? Were they on time? You can see that’s the most important factor, so don’t let it slide!

Credit utilization (30 percent)

How much credit do you have, and how much of it are you using? In general, it’s best to keep your balances below 30 percent of your available credit. That means that if your credit card has a $2,000 limit, avoid charging more than $600—even if you pay it off. It’s important to mention that this element is related to “revolving credit,” which includes lines of credit and credit cards, rather than “installment” loans, which are fixed amount loans, such as your student loans or mortgage. Those will have a set monthly payment.

Length of credit history (15 percent)

How long have you maintained credit? Since age matters, don’t close older accounts, even if you are offered a more attractive credit card that you use most of the time.

Credit mix (10 percent)

What different types of credit accounts do you have, like credit cards, mortgages, auto loans or student loans? Don’t apply for loans just to have them, but don’t worry if you do have a few different types, assuming you are paying the bills on time.

New credit (10 percent)

How often have you applied for more credit cards or loans? Too many credit inquiries can make a lender wonder if you’re about to go on a spending binge.

In comparison, VantageScore tells us how influential various factors are, instead of providing a percent breakdown. Here is a general guideline:

Payment history (extremely influential)

As with FICO, this is your No. 1 path to a great VantageScore. Pay those bills on time.

Age and type of credit (highly influential)

This essentially combines the FICO categories of “length of credit history” and “credit mix” into one bucket.

Percentage of credit limit used (highly influential)

This is similar to FICO’s “credit utilization.”

Total balances/debts (moderately influential)

This will reward you when you keep your debt levels low, even if you are making payments.

Recent credit behavior (less influential)

Like FICO’s “new credit,” this takes into consideration how many loans or credit cards you’ve applied for recently since theoretically, you could owe a bundle if you used them all at once.

Available credit (least influential)

Even if you have a lot of credit available to you, only use what you need.

Given that the credit agencies spell out what they are looking for, you have an excellent opportunity to burnish your credit score by assessing where you are weak and taking steps to improve those areas, as mentioned above.

What is a good credit score anyway?

You probably asked that about your SAT and the answer was, “It’s relative.” That’s because a score that was solid local university material wouldn’t cut it at an Ivy League school. But when you ask if your Uber rating is good, the answer is more consistent. Your number should probably range between 4.5 to 4.9 if you want to be pretty sure a driver will circle back to get you.

Credit scores are the same way; while there’s a range that’s acceptable, you want to shoot for the top. FICO has shared its scale to help you gauge the health of your credit score.

That’s not to say that the best rates are only reserved for those “exceptional” folks, but in general, you’re going to want to hit the “good” to “very good” categories. And for some types of mortgages, there are certain numbers you must hit to be considered.

For example, to qualify for most mortgages, you need to have a minimum credit score of 620 for a fixed-rate loan and a 640 for an adjustable rate mortgage, and even then lenders are likely to offer more attractive rates the higher your credit score is. And for an FHA loan, you can make a much smaller down payment if your score is higher: Consider that with a 580+ you need only put down 3.5%, but that amount jumps to 10% if your credit score is between 500 and 579; and you are not eligible at all under 500. In fact, that’s a perfect illustration of how a lower credit score might make a lender feel less confident that you might be a good risk for paying them back, and thus require more in the way of collateral.

How can I find out my credit score?

So now that you know what all goes into a credit score, you’re probably wondering how you find out your own number. There are a variety of places you can get your credit score—check with your credit card company or your bank to see if it’s a service they offer. You also should check your credit report, which will give you a status update on how well you’re doing. Those are available for free once a year from each of the three nationwide credit bureaus at AnnualCreditReport.com.

Knowing your credit score—and how to improve it—is a key step on the important journey of financial health. And improving your score even a little can save you a lot of money in interest if you need to borrow money.